Death of Fuel Oil Exaggerated as Ships Fit Scrubbers

(Bloomberg) -- One of the world’s most polluting fuels may have some life left in it yet.

Demand for high sulfur fuel oil is expected to crater in 2020 when the International Maritime Organization introduces a cap on sulfur. But companies that build exhaust cleaning systems for ships, which enable the vessels to keep burning the fuel, reported bumper orders this week. Shares of one, Alfa Laval AB, rose to a record after saying it was nearly sold out for next year.

Death of Fuel Oil Exaggerated as Ships Fit Scrubbers

Weakness in the fuel oil market has been one of the biggest impacts of the IMO’s impending 2020 sulfur cap. Fitting ships with exhaust cleaning systems -- known as scrubbers -- is still expected to be a relatively marginal solution for vessels and demand for the fuel will still drop sharply in 2020. But with companies now reporting surging orders, some think that the fuel oil market may have overshot.

“Ships have to go offline to get scrubbers fitted, so the economics have to be telling,” said Richard Fullarton, founder of London-based oil hedge fund Matilda Capital Management. Fuel oil cracks, or its price relative to crude oil, “may have gone too far and if more scrubbers are fitted, demand will be stronger than people expect.”

Officials at Wartsila Oyj said in an interview Thursday that they’d seen an increase in orders for scrubbers from the first quarter to the second this year, aided by a 170 million euro ($197 million) contract with a major European container shipping company. Shares of Alfa Laval, also a big supplier of scrubbers, jumped this week after its earnings were buoyed by surging orders. Although the company didn’t detail an exact order pipeline, one analyst on the company’s post-earnings call said he believed demand had tripled since the first quarter.

Alfa Laval previously said that it expects to see 5,000 ships fitted with scrubbers. That estimate may increase, CEO Tom Erixon said on a call with reporters after earnings this week. The merchant fleet numberered about 94,000 ships at the end of 2017, according to data from Clarkson Research Services Ltd., a unit of the world’s largest shipbroker.

©2018 Bloomberg L.P.